Can Medical Marijuana Shops Be Franchised?

Depending on how you look at it, between 13 and 17 states have laws that permit marijuana to be dispensed for medical reasons.  In some states, selling medical marijuana has become big business; for example, in Colorado, there are more legal pot dispensaries than there are Starbucks locations.  These businesses exist in a legal gray area: while they are permitted by applicable state law, they are still illegal on the federal level.

A hot topic of conversation at the International Franchise Association’s annual convention and its Legal Symposium was the franchising of these stores.  When hearing the stories about medical marijuana franchises, I suspected they were just rumors.  But a simple Google search confirms that right now, there are a handful of companies out there that claim to be selling such franchises.

I try to stay away from politics in this blog (except on issues like small business legislation and diversification of Nevada’s economy).  In this post, I’m not expressing any opinion on medical marijuana or the legalization of pot in general.  With that in mind, I do have significant concerns about the legal risks of selling franchises in this space, even under the more permissive legal environment that exists under the Obama administration. 

The problem is that, while medical pot dispensaries may be legal under various state laws, the sale of marijuana remains a federal crime.  What that means for the business owner is that, while he or she may be free from prosecution by state authorities, there is no guarantee that he or she will not be charged with a federal crime for dispensing medical marijuana for a profit. 

The threat of federal prosecution continues to be a very real possibility.  While it is true that the Obama administration has taken a more permissive view towards distribution of pot for medical reasons, the federal government is clearly not giving a free pass to medical marijuana businesses.  To clarify its position on the issue, the U.S. Department of Justice ("DOJ") has stated that, as a matter of enforcement policy, federal resources will not be focused on "individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana."  But the DOJ has not adopted the same policy towards medical marijuana businesses.  In fact, the Department has stated:

Prosecution of commercial enterprises that unlawfully market and sell marijuana for profit continues to be an enforcement priority of the Department. To be sure, claims of compliance with state or local law may mask operations inconsistent with the terms, conditions, or purposes of those laws, and federal law enforcement should not be deterred by such assertions when otherwise pursuing the Department’s core enforcement priorities.

(emphasis added). Based on the DOJ's guidance, it is clear that medical marijuana business owners will continue to face the threat of federal prosecution for the foreseeable future. 

The uncertainty in this area and the continued possibility of enforcement presents a substantial obstacle to a company that wants to franchise a business selling medical marijuana.  A company’s efforts to franchise such a business would undoubtedly be considered a “commercial enterprise” that would “market and sell” pot for a profit.  This means that it would not only be the franchisor, but also the franchisee, under such an arrangement that would face the risk of prosecution.  Moreover, it would also be difficult as an ethical matter for an attorney to assist a for-profit company in establishing or purchasing a franchise due to its illegality under federal law.  

The only possible exception to this would be where the distribution network is established as a not-for-profit association of dispensaries.  Indeed, the DOJ’s statement that it will focus on the prosecution of “commercial enterprises that unlawfully market and sell marijuana for profit” could be interpreted as a statement by the Justice Department that it does not intend to prosecute nonprofit dispensaries that operate in compliance with state law.  However, any protection that exists for these organizations would disappear if and when they begin to profit from their sales.

Last, it may be that franchising of a business that sells marijuana itself for profit is sufficiently distinguishable from a company that does not actually sell pot, but instead sells the tools and items that an individual consumer needs to grow his or her own marijuana at home, for personal consumption.  In fact, there is at least one company that appears to be doing just that: specializing in "hydroponic plant growing," the company does not sell marijuana directly.  Instead, it provides "everything a consumer may need for growing it on their own." 

As long as it remains illegal on the federal level to sell marijuana for any purpose, it will continue to be difficult and risky for companies who sell medical marijuana at a profit to operate either directly or through a network of franchisees.